Taxing Your Way to the Poor House

posted at 10:05 am on November 26, 2010 by Jazz Shaw

File this one under, “you can’t tax your way out of bad economic policy.”

It’s no secret that New York – once upon a time one of the economic powerhouses of the Unites States – has fallen on hard times. Particularly in the upstate region, crippling tax rates on both businesses and individuals combined with an extended period of economic lethargy have resulted in employers fleeing to more favorable climes and the workers following them. (The population decline has been such that on Dec. 31st we’ll find out if we’re losing one or two congressional seats.)

One result of this is reduced revenue for the state government and increasingly disastrous budgets. But in typical fashion, rather than countering these trends to bring jobs back, the Empire State decided to just keep jacking up taxes on pretty much everything. This included the latest round of increases on cigarette taxes to the tune of an additional $1.60 per pack- a move which Governor Paterson claimed would bring in more than a quarter billion dollars for the state’s coffers. So, how did that work out?

Following the trend started in July, data show that sales of taxed cigarettes have dropped 27% since the new taxes went into effect, with retailers selling an average of 30 million packs per months, 11 million fewer packs than before the new tax. Time for a little cigarette math!

If Albany was making $2.75 off an average of 41 million packs a month, they were earning around $113 million. With the new $4.35 tax on 30 million packs, they’re making about $130 million. Far from the $260 million Paterson planned on making.

Well, it may not be much in the way of a cash windfall, but at least they’ve gotten millions of people to stop smoking – a huge positive effect – right?

Not so much. People were already running the borders to Vermont and New Jersey to save money, and now the trend has spread to Pennsylvania where the price is nearly half that in New York.

In a two-mile strip off Route 6 in the state, eight tobacco shops have recently popped up where its easy to buy and sell back to broke smokers looking for an angry fix. One research scientist said, “If you talk to smugglers, it’s a piece of cake. The profit margin is good, the penalties are low, and it beats selling cocaine.”

Yes, it’s not just individual smokers heading over the border to get their fix. It’s a new generation of bootleggers who are not only allowing people to continue smoking, but are cutting the profits of small businesses who have lost sales.

On the plus side, it’s providing work for anyone with a truck who is willing to undertake a bit of smuggling. Hey … who said the government can’t create jobs?

Vets can also head to one of the few open bases in NY and buy them at the PX. Plus, I would suspect that Canada would also have some lower prices on cigarettes than NY, and Niagara is just sitting there…

so i guess that whole period of prohibition didn’t teach the lefty nannies anything. Those that do not know history are doomed to repeat history. I just hope the people in NY don’t have to stand in line for bread at the stores. well really I don’t I kind of hop they carry their salt campaign to its logical conclusion and ban all food.

And law enforcement is also worried that the easy cash will spark rivalries among criminal gangs, just as drugs have.

“We see lots of [rip-offs] and violence with drug trafficking, and you will see a rise of that in tobacco, too. As volume and money go up, the stakes get higher. And certainly, a concern of ours is violence will spill out of this,” Turk said.

Alleged gun-running and terrorist-loving ex-Stuyvesant HS teacher Theo Burroughs, busted in a sting two months ago, was trafficking in untaxed cigarettes along with assault rifles and handcuffs, authorities said.

ROFLMAO….the city of NY has given a quick easy way for terrorists to fund themselves. OMG If I lived in NY I would move.

1. If we raise the tax rate on X, we’ll bring in a lot more money from the people who do X.
2. If we raise the tax rate on X, people will do less X.

Obviously, if the tax rate is 0, there will be no tax collected. Increasing the rate from 0 will bring in more money. Equally obviously, if the tax rate is so high that people stop doing X entirely (at least doing it where they can be taxed), there will also be no tax collected. Reducing the rate from that point will bring in more money. Somewhere between these extremes, a maximum revenue point will be reached. Moving the rate in either direction from that point will reduce revenues.

Depending on whether you think there is value in reducing X itself, you may logically conclude that accepting somewhat lower revenues in exchange for more (if X is good) or less (if X is bad) of the behavior being taxed is a good idea, but going the other direction will always be a bad idea.

This all seems self-evident to me. Why is it so hard to get people to understand it?

This all seems self-evident to me. Why is it so hard to get people to understand it?

The Monster on November 26, 2010 at 10:44 AM

It’s called the Laffer curve:

In economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of Taxable Income Elasticity (that taxable income will change in response to changes in the rate of taxation). The curve is constructed by thought experiment. First, the amount of tax revenue raised at the extreme tax rates of 0% and 100% is considered

Wasn’t there a deal about tea and taxes in a harbor a few years back? I seem to remember reading about it and a little blow up that happened afterwards. I think I read that someplace. Yes, I’m sure I did.

1. If we raise the tax rate on X, we’ll bring in a lot more money from the people who do X.
2. If we raise the tax rate on X, people will do less X.

Obviously, if the tax rate is 0, there will be no tax collected. Increasing the rate from 0 will bring in more money. Equally obviously, if the tax rate is so high that people stop doing X entirely (at least doing it where they can be taxed), there will also be no tax collected. Reducing the rate from that point will bring in more money. Somewhere between these extremes, a maximum revenue point will be reached. Moving the rate in either direction from that point will reduce revenues.

Depending on whether you think there is value in reducing X itself, you may logically conclude that accepting somewhat lower revenues in exchange for more (if X is good) or less (if X is bad) of the behavior being taxed is a good idea, but going the other direction will always be a bad idea.

This all seems self-evident to me. Why is it so hard to get people to understand it?

The Monster on November 26, 2010 at 10:44 AM

Yup. And then electing the people to determine what X’s should be taxed.
Ain’t democracy grand?
That’s why we were set up as a republic, nota democracy.
Remember: a gang rape and a lynching are examples of democracy. When the victims are armed you have a republic.

needless to say the government of NY has gone past the equilibrium point and is fast approaching point B. the fact that they raised more rev should not be mistaken for what is going on. Rev will now decrease for every year the new tax is in force and it becomes more profitiable and more organized to avoid the tax. If this new tax is not repealed the tax rev will approach zero within the decade.

John Hancock was a smuggler. That’s how he got rich. And it was done to avoid British taxes. Hancock in turn funded much of the early revolutionaries in Boston. Honorable profession, smuggling, if you’re an honorable person.

Depending on whether you think there is value in reducing X itself, you may logically conclude that accepting somewhat lower revenues in exchange for more (if X is good) or less (if X is bad) of the behavior being taxed is a good idea, but going the other direction will always be a bad idea.

This all seems self-evident to me. Why is it so hard to get people to understand it?

The Monster on November 26, 2010 at 10:44 AM

Sorry, but there is nobody in the current administration who can understand anything you say….especially the “Council of Economic Advisers,’ The Fed, the Treasury Dept, and the CBO.

Democrats (and some RINOs) believe that to get revenue, you just change the tax rate to a higher number: people who won’t sit there and take this abuse are evil and stupid. The fact that this has never actually worked in any society is irrelevant: if it doesn’t bring in more money, you raise the rate even more…everybody at Democrat cocktail parties knows this will work.

have you not been paying attention. That is what the push for one world government is all about. The reason to the left on way the USSR failed is because people had a place to flee too. with a one world government we will not have any place to flee too.

This all seems self-evident to me. Why is it so hard to get people to understand it?

The Monster on November 26, 2010 at 10:44 AM

Because the left doesn’t approach economics with a rational mind set. Their ideology makes a number of self evidently false claims, as you note, and they will believe their textbooks and talking points over their own lying eyes…

Prediction – as Connecticut grapples with an existential deficit there will be shouts to raise the cigarette tax to match NY’s.

Thank God I quit 4 years ago….

darkpixel on November 26, 2010 at 11:17 AM

I think you map is wrong. Alaska (besides NY) pays the highest amount of tax federal and state/local (about 5.25 a pack) and it will be going up AGAIN! As of right now.. I pay 9.25 a pack of marlboro. I recently started up again… bad on me. :(

I read Jazz led in again, he was talking about cigarette tax, then I stand corrected. I thought it was about total tx burden. I am surprised the moonbats in Vermont did not tax cigarette to high heaven though. They must have thought the cigarette tax applies to joints as well.

NYS even has a surtax on every penny in excess of 100,000 on AGI–Note that’s a tax on gross income BEFORE deductions.

Sales and use tax–If you purchase any item out of state-NYS wants you to declare it on your income tax form (under penalty of perjury if you don’t). Ex NYS sales tax c 8.875 %. Maine sales tax 5 %. If you buy a frammis in Maine, NY wants you to pay the additional 3.875 tax (8.875-5). Thus the NYS income tax form becomes a PERJURY TRAP for all taxpayers and 100 % of them are criminals by definition.

PS I quit smoking years ago but if I didn’t I would drive to North Carolina and load my trunk with dozens of cartons and make sure I didn’t grossly exceed any speed limits coming back. PS thousands upon thousands of NY smokers do this-or do so via the internet.Any expectations of income from such egregious tax increases is sheer lunacy.

Pardon my math question but even had smoker purchases remained at 41 million pack, how does charging 4.35 per pack equal 260 million per month? Last time I checked, multiplying 4.35 times 41 million resulted in about 180 million. It’s no wonder NYS is so screwed when its political class are mathematical and economics morons. Moreover the NYS political class are social morons as well thinking that people will increase their spending on highly taxed items rather than seeking alternative less costly goods. Democraps must believe that purchasing behavior is static. The same customers who bought yesterday X amount of Y products will do the same no matter how the government mauls them. Well democraps, welcome to the real world.
Indeed, one also has to question the mental state of these democrap politicians, cause they raised the taxes to reduce smoking consumption, supposedly, yet expected tax revenues to go up. Didn’t anyone ever teach them about the law of diminishing returns?-no I’m not talking about the midterm tsunami here. Obviously not.